How to jumpstart your child's financial future

If you're a new or soon-to-be parent, free time is at a premium. And sorting through different investment account options is confusing and time-consuming. On this episode, Life Kit reporter Andee Tagle walks you through different savings methods, from the new Trump accounts, to classic 529 plans, to custodial brokerage accounts, and will help you prioritize which method to use. Follow us on Instagram: @nprlifekit https://www.instagram.com/nprlifekit/?hl=en Sign up for our newsletter here. https://www.npr.org/newsletter/life-kit Have an episode idea or feedback you want to share? Email us at [email protected] mailto:[email protected] Support public media with NPR+ and enjoy perks for over 25 podcasts like this one. This show’s perks include sponsor-free listening and convenient playlists of popular help topics like personal finance, getting healthy, and more. Learn more at plus.npr.org http://plus.npr.org/. See pcm.adswizz.com https://pcm.adswizz.com for information about our collection and use of personal data for sponsorship and to manage your podcast sponsorship preferences. NPR Privacy Policy https://www.npr.org/about-npr/179878450/privacy-policy

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Speaker 00

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• 0:24Marielle Segarra?

  My nephew's birthday is coming up, and I think I'm going to put money in his investment account instead of getting him a bunch of toys.

• 0:32Speaker 02

  Please do that. You know what he does not need and his parents do not need is another noisy, flashy toy that takes up space on the floor that they're going to step on in the middle of the night and curse you for. Please do that. And you know, I think it's really common these days, your circles want to help, you know, grandparents, aunts, uncles. Like, I opened Ted's 529 at the urging of my aunt and uncle, who are super financially savvy. They were like, please, please, please, do this before he's born. And every, every single birthday, every single Christmas, on my birthday, they contribute to his 529, which I just think is so loving.

• 1:12Marielle Segarra?

  Yeah. I think some family members will be relieved to have something they can contribute to and not have to pick out the right toy or the right gift.

• 1:23Speaker 02

  Yeah, it can take some pressure off.

• 1:24Marielle Segarra?

  He already has the dancing cat that repeats phrases. So what else could he need?

• 1:29Speaker 02

  I've seen that thing. Awful.

• 1:31Marielle Segarra?

  My dad thinks it's a spy.

• 1:33Speaker 02

  Yeah, it's creepy.

• 1:35Marielle Segarra?

  You're listening to Life Kit. I'm Marielle Segarra, and I am talking to Life Kit reporter, Andy Tagle, who's been reporting on how new parents can build a financial nest egg for their kids. Andy, how hard is this to do, to plan for your kid's future financially?

• 1:53Speaker 02

  I mean, it's not hard in the same way like AP Calculus is hard, but it can be very mentally taxing to do this stuff. It requires a lot of time and emotional resources to get done right. And you know who is extra, extra short on time and emotional resources, Marielle?

• 2:10Marielle Segarra?

  You.

• 2:11Speaker 02

  New parents. Yeah, new parents.

• 2:14Marielle Segarra?

  I guess you're not a new parent, but yeah.

• 2:16Speaker 02

  Yeah, also me. Yeah, I'm out of that newborn parent phase, which is such a special time for so many reasons. And it's exactly when you should start setting up those accounts or, you know, at least talking about these kinds of accounts, but also when you have the perfect excuse to push a lot of these decisions off, right? That's the way one source put it, and it is so true.

• 2:39Marielle Segarra?

  Totally. I also think, though, it helps to remember that you don't have to do everything at once and that you don't have to set aside a huge amount every month. Because you, you have a long time horizon, right? If you start contributing in small amounts now, then you've got many years, maybe even decades, for it to compound before your kid is going to tap into it.

• 3:00Speaker 02

  Yeah, absolutely. And I think that's an important point, you know? You don't have to be rich to start building up your kid's financial future. This process is possible for a lot of people because it's not about wealth so much as follow through. So if any of our listeners are becoming parents this year or are hoping to become parents even in the next couple of years, it's as simple as opening up an investment account, in particular, the 530A. It's sometimes called a Trump account. Here's behavioral scientist and professor Wendy De La Rosa to explain.

• 3:28Speaker 03

  They're essentially free money that new parents can claim and start on their journey of investing for their children for free, essentially, from our federal government. And so claiming that is sort of step one. You can't put money into an account that you don't have.

• 3:45Marielle Segarra?

  So that's a good starting place. And often we say on Life Kit, right, it's like, start small, take the first step. In this case, it's like, just open the account.

• 3:54Speaker 02

  The gap between knowing and doing. You got to do it. And we, we can help. We can help get you motivated.

• 4:00Marielle Segarra?

  On this episode of Life Kit, we'll talk more about Trump accounts and other kinds of investment accounts that you can open for your child and how to prioritize between them. That's after the break.

• 4:21Speaker 04

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• 5:13Speaker 07

  Hi there. I'm Brittany Luce. And not to brag, but I host a really fabulous podcast. It's called It's Been a Minute. I love making it, and I think you'll love listening to it. Over the last year, hundreds of thousands of listeners have been tuning in. And I got to say, if you haven't yet, you're missing out. Listen to the It's Been a Minute podcast from NPR today.

• 5:38Marielle Segarra?

  You were saying, Andy, that any parent really can set up their kids for financial success in the future. What about if you're in a situation where money is tight?

• 5:49Speaker 02

  Yeah, that's a good question, because that's where a lot of people are at right now, right? So, important caveat before we jump in here, Marielle. We're going to walk through a lot of different forward-thinking savings methods, but all of my sources said the very first step new parents should take is to prioritize your financial needs, meaning make sure you're on solid financial footing before allocating anything towards those kid investment accounts.

• 6:13Marielle Segarra?

  With the exception of the free money from the government.

• 6:17Speaker 02

  Exactly. With the exception of that free money, which we're going to get to in just a minute. So, pay off your debt, build up that emergency fund, fund your retirement account, and then you can think about turning to those kid investment accounts. Little at a time when you have money to spare. I talked to Bola Shogunbi about this. She's a certified financial education instructor. She's the founder of Clever Girl Finance, and she's a mom to twins. She told me that parents can sometimes get so focused on saving for their children that they can forget about protecting their own finances. But you don't want to put everything towards your child's future and then end up becoming financially dependent on those kids because you didn't prepare for your own.

• 6:56Marielle Segarra?

  Okay, so in this episode, we're assuming that you do already have those fundamentals covered. Now let's talk about our options. What kinds of investment accounts are out there for kids?

• 7:09Speaker 02

  All right. The Trump accounts. They're also known as the 530A, federal accounts. So what's special about this account is that for any US citizens born between 2025 and 2028, the federal government offers a one-time, $1,000 initial contribution when an account is opened. Wendy De La Rosa says for anyone who's about to become a new parent, this one is a no-brainer.

• 7:33Marielle Segarra?

  What about parents whose kids were born before 2025, so they don't qualify for that $1,000 deposit? Is there still a reason for them to open one of these accounts?

• 7:45Speaker 02

  Short answer, maybe. This account is meant for long-term retirement savings, and it comes with a fair amount of strings. So for one, money can't be withdrawn until the child reaches 18, period. And withdrawals before they reach 59 and 1/2 are subject to penalties with a few exceptions.

• 8:03Marielle Segarra?

  Okay.

• 8:04Speaker 02

  Other things to know is you'll pay tax upfront on the money you put in there. If your employer contributes to the plan, that money will be taxed later when your child withdraws it. In addition to the $1,000 from the government, you and your employer can contribute a combined $5,000 per year. Also, the money in that account will only be invested in low-cost, broad US market index products. So it's earmarked for very specific investments, which isn't the same with other accounts. So it's, it's pretty inflexible comparatively. Bola says if your child doesn't qualify for the government seed money and you haven't started saving for the future yet, other accounts like a 529 or a Roth IRA are likely better, more flexible options. If you do want to open it, put it last on your list.

• 8:46Marielle Segarra?

  All right, let's talk about another popular investment account for kids, the 529 plan.

• 8:55Speaker 02

  Yeah, this is probably the one most people have heard of. It's a state-sponsored investment account specifically for qualified education costs. You don't have to go with a state plan, but there are usually incentives to do so. Contributions are after tax, and whoever opens the account, it's usually a parent, but it could also be a grandparent or another relative, indefinitely controls the account. So it doesn't pass on to the child after a certain age. And it's worth taking the time to open one of these because the earnings are tax-free.

• 9:26Marielle Segarra?

  So if your kid turns 18, you don't have to give them that money?

• 9:31Speaker 02

  No, it's yours.

• 9:33Marielle Segarra?

  So you could use it like for your own schooling?

• 9:36Speaker 02

  Yes. You can change the beneficiary as well. Like if your kid decides they don't want to go to school. It's also not just strictly college. It can be trading credential programs, K through 12. I even, I read online, like it can be for qualified expenses, like a printer, dorm room expenses, things like that.

• 9:52Marielle Segarra?

  Oh, OK.

• 9:53Speaker 02

  Yeah.

• 9:54Marielle Segarra?

  Yeah, because I think the fear is that you'll put money into an account that's then locked up in there and you won't have a need for it.

• 10:01Speaker 02

  Absolutely. If your kids don't end up going to college or you don't want to use it for education expenses, you can roll those funds over up to $35,000 into a custodial Roth IRA account for your child.

• 10:13Marielle Segarra?

  Which is a retirement account.

• 10:14Speaker 02

  Exactly.

• 10:15Marielle Segarra?

  But also Roth IRAs are, you can withdraw your contributions at any time from a Roth IRA without penalty. So it's not even as, the money's not locked up the same way it is with like a traditional IRA or a 401K.

• 10:33Speaker 02

  Exactly. But the 529 account has to have been open for at least 15 years.

• 10:39Marielle Segarra?

  To do that rollover.

• 10:41Speaker 02

  Yeah, which is another motivation to open that account as early as you can.

• 10:45Marielle Segarra?

  What other kinds of investment accounts might parents consider for their kids?

• 10:50Speaker 02

  So next up is two different types of custodial brokerage accounts, the UTMA and the UGMA, or Uniform Transfers to Minors Act and Uniform Gifts to Minors Act accounts. You still with me?

• 11:05Marielle Segarra?

  I have to say UTMA and UGMA sound like two trolls under the bridge that you have to like solve these riddles through. Do you get where I'm going with this?

• 11:14Speaker 02

  Yes, absolutely. OK, so our friends UTMA and UGMA, they are custodial brokerage accounts. And they're, which means they are investment accounts opened and managed by parents on behalf of a child. You can use them for medium to long-term savings. The main difference is that the UTMA can include other assets like real estate or art. Unlike the 529, ownership of these accounts transfers fully to the child at the age of majority. So that's 18 or 21, depending on your state. Contributions are after tax, but investment earnings may be subject to annual kitty tax rates.

• 11:51Marielle Segarra?

  OK, so they, their tax rates are not as high.

• 11:54Speaker 02

  Yes, exactly. And UTMA and UGMA are troll friends. They are the most flexible because these funds can be used for any purpose at any time. They're not earmarked for education. They're not on lockdown until retirement. There's also no limits on contributions or the types of investments you can make with these funds the way that there is with a Trump account. For that reason, they're also not as tax advantaged as the other two. So this is the type of account you might contribute to if you want to help your kid down the line with, say, a down payment on a house or paying for a big wedding, something like that. Final option I'll mention is a custodial Roth IRA. So similar to the grown-up accounts. This account is a way to kickstart tax-free retirement growth for your little one. Contributions are made with after-tax money. However, for the vast majority of brand-new parents, this account really won't be relevant

• 12:39Speaker 02

  because it requires your child to have earned income. So this is more one to consider a little further down the line, unless your baby is a baby cat model.

• 12:48Marielle Segarra?

  Yeah, what is income for a baby?

• 12:50Speaker 02

  Yes, that was a good question. A note here that income is actually a big umbrella. So they don't need to necessarily have a W2. Informal jobs like babysitting, dog walking, they can count, they can qualify. You just need to double-check with your financial institution because proof of income can vary, depending on the institution.

• 13:09Marielle Segarra?

  After the break, we talk about how to prioritize between these accounts. Because, parents, we understand. You can't do it all.

• 13:17Speaker 02

  Yeah.

• 13:17Marielle Segarra?

  Especially not all at once.

• 13:26Speaker 04

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• 14:20Marielle Segarra?

  So we talked about four different kinds of investment accounts. It's a lot to think about. How can parents start to prioritize?

• 14:31Speaker 02

  So first off, you don't have to open an account just because it exists. Bola told me it is absolutely OK to start with just one or two that align with your goals and contribute what you realistically can. The important thing here is just to get started as soon as you can. You know, like if college is a goal for your family, if that's something you have on the horizon, open that 529. As we said earlier, time is money. And when it comes to these kid accounts, we mean that very literally because of compound interest. Listen to Chris Schuit. He's a dad of two, author of the book, You Are Now the CFO of a Very Small Family. And he is the Life Kit listener who pitched us this story idea. Thank you, Chris.

• 15:08Speaker 06

  $50 here, $100 there. Over time, at average returns of 7% to 8%, can actually make a very large impact over the course of 10, 15, 20 years and provide, you know, a welcome financial uplift for your children in the future.

• 15:24Marielle Segarra?

  And, I mean, at the same time, you can only do what you can do. But like, if you just are not doing it because you're like, I'll get to that.

• 15:33Speaker 02

  Right.

• 15:33Marielle Segarra?

  You know?

• 15:34Speaker 02

  That's a silly reason to not.

• 15:35Marielle Segarra?

  Yeah. If you're feeling ambitious and you did want to open all four kinds of accounts that we mentioned today, what's the order of operations that the experts recommended?

• 15:47Speaker 02

  So if you're a new parent who feels compelled to open every single one of these, and you have the means to do so, a few different lines of thinking here. For Bola, the PemDAS, to max out your child's savings is to start with that free $1,000 in a Trump account. Then put money into a 529 plan up to your state's deduction limit for tax-free school savings. After you hit that limit, use a custodial account, UTMA or UGMA, for flexible cash to cover milestones like a first car. And then finally, open that standard Roth IRA the second your kid starts earning income to kickstart their retirement. That's how she would do it.

• 16:27Marielle Segarra?

  Besides these kinds of investment accounts, is there anything else that parents should be thinking about in terms of setting their kid up for financial success?

• 16:38Speaker 02

  Yes, there is, actually. All the experts I talked to suggested focusing on the same general buckets in the same order. Life insurance, wills and guardianship, and then child savings accounts. So you can do all of those at once, but if you have limited time and energy, first do your life insurance, then your will, then child investment accounts.

• 16:56Marielle Segarra?

  You know, at the end of the day, I feel like this is really about giving your children the gift of freedom. Like, for a lot of us who didn't graduate with an investment account in hand, it's a really beautiful idea to think that you could put away some money, even a small amount, little by little, so that your kid's life is easier than it would have been otherwise. Because a lot of people, if they don't have a safety net or they don't have any savings, they stay in jobs that are really a bad fit or they really hate what they're doing

• 17:41Marielle Segarra?

  and they don't leave because they can't. And I like the idea that my kids would have some choice.

• 17:49Speaker 02

  The gift of options, the gift of choice.

• 17:52Marielle Segarra?

  Yeah.

• 17:53Speaker 02

  That's really nice, yeah. Bola had a really nice sentiment that I want to leave you with. She said, "One thing I always remind parents is you don't have to have everything figured out financially all at once the moment your child is born. Just start with what you can afford and build from there. Because as much as we want to give our children every possible advantage, taking care of your overall financial stability is also part of taking care of your children, which I thought was a really nice way to think about it."

• 18:24Marielle Segarra?

  Yeah. It's like, put on your own oxygen mask first.

• 18:28Speaker 02

  Yeah, and then keep building from there.

• 18:31Marielle Segarra?

  Andy, thank you so much for this.

• 18:32Speaker 02

  Marielle, thank you.

• 18:37Marielle Segarra?

  OK, time for a recap. Takeaway one. Sometimes, parents get so focused on saving for their kids that they neglect their own finances. Don't do that. Pay off your debt, build up your emergency fund, and contribute to your retirement account because you deserve financial security. And because if you don't prepare for the future, your kids may end up having to take care of you financially. Takeaway two. If you have a baby born between 2025 and 2028, sign them up for a 530A investment account, also known as a Trump account. They'll get free money, $1,000, from the government that you can invest in index funds and watch grow over time. The account will transfer to them when they turn 18, but it's meant for retirement.

• 19:22Marielle Segarra?

  So they'll pay fees on this government money and the profits if they withdraw it before age 59 1/2, with some exceptions. Takeaway three. Consider a 529 plan. It's a state-sponsored investment account for qualified education costs. And you don't have to have a child to open one of these. You can make yourself or another family member the beneficiary and then change the name once the baby is born. You also don't have to be the parent to open one. Takeaway four. Meet UTMA and UGMA, two types of custodial brokerage accounts for kids. Ownership transfers to your kid at 18 or 21, depending on the state. They may pay taxes on earnings. This account is not as tax advantaged as the others, but as a result, it's more flexible.

• 20:07Marielle Segarra?

  So it can help your kid with medium-term savings if they want to buy a house or start a business or pay for a wedding. Takeaway five. The custodial Roth IRA is a retirement account, similar to the regular Roth IRA. Contributions are after tax and you can withdraw them anytime. Growth is tax-free once you hit retirement age, but you can only contribute money to this that your child has earned. All right, that's our show. If you love Life Kit and you want even more, follow us on Instagram, @nprlifekit. There you'll find videos featuring our favorite tips and comics on topics like how to get pregnant and how to make a small home look bigger. You can find those by following @nprlifekit.

• 20:52Marielle Segarra?

  This episode of Life Kit was produced by Sylvie Douglas. Our digital editor is Malika Gharib and our visuals editor is CJ Riechelmann. Megan Cain is our senior supervising editor and Lauren Gonzalez is our executive producer. Our production team also includes Claire Marie Schneider, Margaret Sorino, and Lennon Sherburne. Engineering support comes from Sina LaFredo. Fact checking by Andrea Lopez-Cruzado. Special thanks to Mandy Woodrow Santos for her input on this story. I'm Marielle Segarra. Thanks for listening.

• 21:28Speaker 04

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